FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1999
Commission file number 000-23447
MIDWAY AIRLINES CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 36-3915637
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2801 Slater Road, Suite 200
Morrisville, NC 27560
(Address of principal executive offices)
(Zip Code)
919-595-6000
(Registrant's telephone number, including area code)
Indicate by checkmark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of
the Securities Exchange Act
of1934 during the preceding 12 months (or for such
shorter period that the registrant was required to file
such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes ____X___ No ________
As of May 10, 1999 there were 8,602,395 shares of Common Stock, $.01 par
value, of the registrant outstanding.
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Midway Airlines Corporation
BALANCE SHEETS
(Dollars in Thousands)
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
(Unaudited) (Audited)
------------- -------------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 37,888 $ 48,736
Restricted cash 13,577 9,512
Short-term investments 7,275 --
Accounts receivable
Credit cards and travel agencies 9,005 4,702
Other (net) 1,687 1,946
Inventories 2,779 2,914
Deferred tax asset 457 457
Prepaids and other 10,442 10,886
--------- ---------
Total current assets 83,110 79,155
Equipment and property:
Flight 107,917 107,143
Other 6,852 6,657
Less accumulated depreciation and amortization (12,492) (10,793)
-------- ----------
Total equipment and property, net 102,277 103,007
Other noncurrent assets:
Equipment and aircraft purchase deposits 21,360 18,103
Aircraft lease deposits and other 6,970 3,316
--------- ---------
Total other noncurrent assets 28,330 21,419
Total assets $ 213,717 $ 203,581
========= =========
Liabilities and stockholders' equity
Current liabilities:
Accounts payable $ 7,881 $ 7,327
Accrued expenses 4,212 5,732
Accrued income and excise taxes 3,648 581
Advance ticket sales 29,470 21,483
Other current liabilities 4,519 5,803
Current maturities of long-term debt and capital leases obligations 5,473 5,349
--------- ---------
Total current liabilities 55,203 46,275
Noncurrent liabilities:
Long-term debt and capital lease obligations 76,979 78,764
Deferred tax liability 7,022 7,022
Other 45 1,057
--------- ---------
Total noncurrent liabilities 84,046 86,843
--------- ---------
Total liabilities 139,249 133,118
Stockholders' equity:
Preferred stock -- --
Common stock 86 86
Additional paid-in-capital 51,032 51,032
Retained earnings ($51.1 million of accumulated deficit eliminated
in the quasi-reorganization as of June 30, 1997) 23,350 19,345
--------- ---------
Total stockholders' equity 74,468 70,463
Total liabilities and stockholders' equity $ 213,717 $ 203,581
========= =========
</TABLE>
<PAGE>
Midway Airlines Corporation
Statements of Operations
(Dollars in thousands, except per share amounts)
(Unaudited)
Three months ended
March 31,
1999 1998
---- ----
Operating revenues:
Passenger $ 53,659 $ 49,074
Cargo 506 410
Contract and other
821 1,037
----------- -----------
Total revenues 54,986 50,521
Operating expenses:
Wages, salaries and related costs 9,002 7,488
Aircraft fuel 4,119 5,084
Aircraft and engine rentals 7,317 7,373
Commissions 3,642 3,984
Maintenance, materials and repairs 3,850 4,108
Other rentals and landing fees 2,391 2,445
Depreciation and amortization 1,729 1,041
Other 14,688 12,432
Equipment retirement charges 927 --
----------- -----------
Total operating expenses 47,665 43,955
----------- -----------
Operating income 7,321 6,566
Other income (expense):
Interest income 890 977
Interest expense (1,749) (1,118)
----------- -----------
Total other income (expense) (859) (141)
----------- -----------
Income before income taxes 6,462 6,425
Income tax expense 2,456 2,570
----------- -----------
Net income $ 4,006 $ 3,855
=========== ===========
Basic earnings per share: $ 0.47 $ 0.45
Weighted average shares used in computing
basic earnings per share 8,602,395 8,558,695
Diluted earnings per share: $ 0.42 $ 0.39
Weighted average shares used in computing
diluted earnings per share 9,652,117 9,798,785
<PAGE>
Midway Airlines Corporation
Statements of Cash Flows
(Dollars in Thousands)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended March 31
1999 1998
---- ----
<S> <C> <C>
Operating activities
Net income $ 4,006 $ 3,855
Adjustments to reconcile net income to net cash provided
by (used in) operating activities:
Depreciation and amortization 1,729 1,041
Capitalized interest on purchase deposits (232) (178)
Changes in operating assets and liabilities:
Restricted cash (4,064) (7,008)
Accounts receivable (4,045) (5,999)
Inventories 138 (150)
Prepaids and other 325 (166)
Aircraft lease deposits and other (3,665) (399)
Accounts payable and accrued expenses (967) (1,278)
Accrued excise and income taxes 3,066 477
Advance ticket sales 7,989 5,111
Other current liabilities (1,284) (1,152)
Other noncurrent liabilities (1,014) (200)
-------- --------
Net cash provided by (used in) operating activities 1,982 (6,046)
Investing activities
Purchase of short-term investments (7,275) --
Purchase of equipment and property (637) (82)
Aircraft and equipment purchase deposits (5,033) 2,551
Refund of aircraft and equipment purchase deposits 1,776 --
-------- --------
Net cash (used in) provided by investing activities (11,169) 2,469
Financing activities
Repayment of long-term debt and capital lease obligations (1,771) (10,518)
Accreted interest on long-term debt 110 216
-------- --------
Net cash (used in) financing activities (1,661) (10,302)
-------- --------
Decrease in cash and cash equivalents (10,848) (13,879)
Cash and cash equivalents at beginning of period 48,736 54,509
-------- --------
Cash and cash equivalents at end of period $ 37,888 $ 40,630
======== ========
Supplemental cash flow information
Interest paid $ 1,785 $ 772
======== ========
Income taxes paid $ 138 $ 2,355
======== ========
</TABLE>
<PAGE>
MIDWAY AIRLINES CORPORATION
Notes to Financial Statements
(Information as of March 31, 1999 and for the three months
ended March 31, 1999 is unaudited)
1. BASIS OF PRESENTATION
The unaudited interim financial statements included herein have been prepared by
Midway Airlines Corporation (the "Company"), in accordance with generally
accepted accounting principles ("GAAP") for interim financial reporting pursuant
to the rules and regulations of the Securities and Exchange Commission. The
information furnished in the interim financial statements includes normal
recurring adjustments and reflects all adjustments which, in the opinion of
management, are necessary for a fair presentation of such financial statements.
The results of operations for any interim period presented are not necessarily
indicative of the results to be expected for any other period. Certain
information and footnote disclosures normally included in the financial
statements prepared in accordance with GAAP have been condensed or omitted
pursuant to the rules and regulations of the Securities and Exchange Commission,
although the Company believes that the disclosures are adequate to make the
information presented not misleading. These condensed financial statements
should be read in conjunction with the financial statements, and the notes
thereto, included in the Company's Annual Report on Form 10-K for the year ended
December 31, 1998.
2. SIGNIFICANT ACCOUNTING POLICIES AND OTHER MATTERS
Use of Estimates and Assumptions
Preparation of financial statements in conformity with GAAP requires management
to make estimates and assumptions that affect the reported amounts of assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during that reporting period. Actual results could differ
from those estimates.
Cash, Cash Equivalents and Restricted Cash
Cash and cash equivalents include investments with an original maturity of three
months or less or which may be redeemed without penalty at any time. These
investments are stated at cost, which approximates market value. As of March 31,
1999 and December 31, 1998, approximately $13.6 and $9.5 million, respectively,
of cash and cash equivalents were restricted as to withdrawal; these funds serve
as collateral to support letters of credit and a credit card holdback and are
classified as restricted cash in the balance sheets.
Short-term Investments
Short-term investments consist of corporate bonds which mature between three
months and one year of the original investment date. These investments are
carried at cost, which approximates market value.
<PAGE>
3. EARNINGS PER SHARE OF COMMON STOCK
The following table sets forth the computation of basic and diluted earnings per
share:
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31
1999 (1) 1998
-----------------------------------------
<S> <C> <C>
Numerator:
Net income (2) $ 4,006,000 $3,855,000
Denominator:
Denominator for basic earnings per share - weighted average shares 8,602,395 8,558,695
Effect of dilutive securities (3):
Employee stock options 659,140 849,496
Warrants 390,582 390,594
-----------------------------------------
Dilutive common shares 1,049,722 1,204,090
Denominator for diluted earnings per share - adjusted weighted average
shares 9,652,117 9,798,785
=========================================
Basic earnings per share $0.47 $0.45
=========================================
Diluted earnings per share $0.42 $0.39
=========================================
</TABLE>
(1) Options to purchase 262,375 shares of common stock at $15.50 per share
were outstanding during 1999 but were not included in the computation
of diluted earnings per share for the three months ended March 31, 1999
because the exercise price of the options was greater than the average
market price of the common shares and, therefore, the effect would be
antidilutive.
(2) Numerator for basic and diluted earnings per share.
(3) Shares calculated using the "Treasury Stock" method under SFAS 128.
4. COMMITMENTS AND CONTINGENCIES
In the fourth quarter of 1998, the Company retired two Fokker F-100 aircraft at
the expiration of the related lease terms. In each of March and May 1999, the
Company retired one F-100 aircraft at the expiration of the related lease terms.
With respect to the retirement of these aircraft, the Company and the lessor
disagree as to the amount of certain life cycle costs required to maintain the
aircraft and as to the level of the Company's responsibility to pay for such
costs. The Company believes that it has met and exceeded its obligations. The
lessor believes that the Company has not met its obligations and that the
Company owes the lessor approximately $1.3 million in connection with the return
of the first of these F-100 aircraft and an unstated amount in connection with
the return of the other retired aircraft. The Company expects to negotiate with
the lessor concerning this dispute and further believes, that if necessary, it
has meritorious legal defenses to the lessor's claims. At this time, it is not
possible to predict the outcome of this dispute.
In August 1998, the Compliance and Enforcement Branch of the Drug Abatement
Division of the FAA conducted an inspection of the company's compliance with
certain regulations related to its alcohol and drug testing programs. In
September 1998, the FAA notified the Company that it was investigating alleged
violations discovered during the August 1998 inspection. The Company responded
to these alleged violations in October 1998 and has received no further written
correspondence from the FAA in this respect. The Company is unable to determine
whether the FAA's investigation will result in the finding of violations of
these regulations and, if so, whether the FAA will pursue an assessment as a
result of any such findings or what the amount of any such assessment might be.
<PAGE>
The Company has firm orders for 14 additional newly manufactured CRJ-200ER
Canadair Regional Jet aircraft, all of which are scheduled to be delivered by
July 2000. Midway also has options to acquire up to 14 additional CRJs. The
Company has ordered two CF34-3B1 spare engines to support the operation of its
CRJ aircraft.
In September 1997, the Civil Aviation Security Division of the Federal Aviation
Administration ("FAA") conducted an investigation of the Company's compliance
with certain regulations requiring the Company to verify the accuracy of the
background information provided by its employees who have access to secure
airport areas. The Company revised its background check procedures during the
course of the FAA's investigation and then obtained and verified the necessary
background information of those employees who had been identified by the FAA as
having insufficient background check documentation. This investigation will
likely result in the finding of violations of these regulations. While the
Company is unable to determine whether the FAA will pursue an assessment as a
result of the findings of this investigation, or what the amount of any such
assessment might be, an assessment could have a material adverse effect on the
Company's results of operations.
In March 1995, Midway entered into an agreement for the acquisition of four
Airbus A320 aircraft with deliveries beginning in 1998. The Company also agreed
to purchase one IAE V2527-A5 spare engine to support the operation of the four
A320 aircraft. Pursuant to the recapitalization, the delivery dates of these
aircraft and the spare engine were extended to 2005 and later. The Company is
required to make deposits on the four A320 aircraft and the spare engine in
amounts to be determined beginning in 2003. The Company is considering several
alternatives with respect to the A320s, including restructuring its purchase
agreement or selling its position.
The Company's pilots and fleet service (ramp) employees are represented by labor
unions. The pilots' representative, the Air Line Pilots Association ("ALPA"),
was elected in December 1997, and the ramp employees' representative,
International Association of Machinists and Aerospace Workers, AFL-CIO ("IAM"),
was elected in June 1998. Prior to those times, none of the Company's employees
were represented by a union. In a December 1998 representation election, the
Association of Flight Attendants, AFL-CIO ("AFA") obtained the votes necessary
to represent Midway's flight attendants. On December 18, 1998 Midway filed a
motion with the National Mediation Board ("NMB") alleging that the AFA
interfered with the election. In February 1999 the NMB found that the AFA had
made misrepresentations during the December 1998 election campaign but
never-the-less certified the AFA as the representative of Midway's flight
attendants. To date, Midway has determined not to seek judicial review of this
decision by the NMB and intends to recognize AFA as the collective bargaining
representative of its flight attendants. Although the Company believes mutually
acceptable agreements can be reached with the unions representing such
employees, negotiations have not yet commenced with the AFA and have not yet
concluded with ALPA or the IAM, and the ultimate outcome of such negotiations
cannot be predicted.
The Company has been named as a defendant in certain pending litigation. The
outcome of these matters cannot be predicted, but it is management's belief that
whatever the outcome, the results will not, either individually or in the
aggregate have a material adverse effect on the company's financial position,
results of operations or cash flows.
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Results of Operations
For the three months ended March 31, 1999 the Company's net income was $4.0
million. Excluding the unusual items discussed below, net income was $4.6
million, up 19% from the net income of $3.9 million for the three months ended
March 31, 1998. Revenue for the three months ended March 31, 1999 was up 9% over
1998 to $55.0 million. Excluding the equipment retirement charges the Company's
operating margin increased to 15.0% in 1999 from 13.0% in 1998.
Earnings per diluted share for the three months ended March 31, 1999 amounted to
$0.42 ($0.47 excluding unusual items) compared to $0.39 for the three months
ended March 31, 1998.
Unusual Items
Three Months Ended March 31, 1999
o $0.9 million equipment retirement charge related to the retirement of three
aircraft, one of which left the fleet in March. (The Company anticipates
that it will incur an additional $0.6 million in charges in the second
quarter of 1999 as it retires one additional F100 and one Airbus A320.)
SELECTED OPERATING DATA
<TABLE>
<CAPTION>
For the three months ended March 31,
--------------------------------------------
1999 1998
--------------------------------------------
<S> <C> <C>
Available seat miles (000s) 375,649 373,166
Revenue passenger miles (000s) 238,624 232,067
Load factor 63.5% 62.2%
Break-even load factor (1) 54.8% 53.9%
Departures 10,482 7,751
Block hours 16,071 12,357
Passenger revenue per ASM (cents) 14.3 13.2
Passenger yield (cents) 22.5 21.1
Average fare $114 $111
Cost per available seat mile (1) 12.7 11.8
Onboard passengers 471,593 441,960
Average seats per departure 74 95
Average stage length (miles) 467 495
Aircraft (average during period) 21.5 15.0
Aircraft utilization (hours per day) 8.3 9.1
Fuel price per gallon $0.48 $0.62
</TABLE>
(1) Excludes equipment retirement charges
<PAGE>
Three Months Ended March 31, 1999 Compared to Three Months Ended March 31,
1998
Capacity. In the three months ended March 31, 1999, the company produced
376 million ASMs, an increase of 2.5 million or 0.7% over the three months
ended March 31, 1998. The increase in ASM production is attributable to 35.2%
more departures (to 10,482), offset by a 5.7% shorter average stage length
(to 467 miles) and 22.1% fewer seats per departure (to 74 seats). These
changes resulted from the Company's decrease in the number of 98 seat F100s
to 10 from 12 during the three months ended March 31, 1999, the 148 seat A320
being out of service for most of the first quarter, and an increase in the
number of 50 seat CRJs, as well as a scheduling realignment initiated in
February 1999.
Operating Revenues. The Company's operating revenues increased 8.8% to
$55.0 million for the three months ended March 31, 1999 from $50.5 million
for the three months ended March 31, 1998. The increase is attributable to a
2.8% increase in revenue passenger miles to 238.6 million and a 6.6% increase
in passenger yield (revenue per RPM) to 22.5 cents. Passenger revenue per ASM
increased 8.3% to 14.3 cents per ASM due to the 6.6% increase in yield
combined with a 1.3 percentage point increase in load factor to 63.5%. Cargo
revenue increased due to the increase in capacity and departures, while
contract and other revenue decreased due to a reduction in charter operations
in the three months ended March 31, 1999.
Operating Expenses. The Company's operating expenses increased 8.4% to
$47.7 million for the three months ended March 31, 1999 from $44.0 million
for the three months ended March 31, 1998. Total expenses increased primarily
due to increases in wages, salaries and related costs, depreciation and
amortization, and other miscellaneous operating expenses, partially offset by
a reduction in fuel cost per gallon, lower commission expense, and lower
maintenance expense. Total operating expense per ASM increased 7.6% to 12.7
cents from 11.8 cents. This increase is attributable to an increase in
depreciation and amortization expense related to the ownership of five CRJs
and the parts for the fleet, equipment retirement charges, and an increase in
other expenses spread over a stable ASM base.
<TABLE>
<CAPTION>
Three months ended March 31,
----------------------------------------------------------------
1999 1998
----------------------------------------------------------------
Cost per Cost per
Percent of Total ASM Percent of ASM
Expenses (cents) Total Expenses (cents)
----------------------------------------------------------------
<S> <C> <C> <C> <C>
Wages, salaries and related costs 18.5% 2.39 17.0% 2.01
Aircraft fuel 8.5% 1.10 11.5% 1.36
Aircraft and engine rentals 15.1% 1.95 16.7% 1.98
Commissions 7.5% 0.97 9.0% 1.07
Maintenance, materials and repairs 7.9% 1.02 9.3% 1.10
Other rentals and landing fees 4.9% 0.64 5.6% 0.66
Depreciation and amortization 3.6% 0.46 2.4% 0.28
Other 30.3% 3.91 28.2% 3.33
------- ------ ------ -------
Sub-total operating expenses before
equipment retirement charges 96.3% 12.44 99.7% 11.79
----- ----- ----- -----
Equipment retirement charges 1.9% 0.25 -- --
----- ----- ----- -----
Total operating expenses 98.2% 12.69 99.7% 11.79
Other (income) expenses 1.8% 0.23 0.3% 0.03
----- ----- ------ ------
Total expenses 100.0% 12.92 100.0% 11.82
====== ====== ======= ========
</TABLE>
<PAGE>
Wages, salaries and related costs increased $1.5 million or 20.2% to $9.0
million for the three months ended March 31, 1999 from $7.5 million for the
three months ended March 31, 1998. The increase is attributable to increased
staffing associated with the addition of the CRJs, increased staffing in
reservations, increased wages per employee, and increased expense in the three
months ended March 31, 1999 for the Company's Bonus Plan implemented in 1998.
Wages, salaries and related cost per ASM increased 0.38 cents or 18.9% to 2.39
cents. The increase in unit costs is attributable to the items noted above as
well as the changes noted in "Capacity".
Aircraft fuel expense decreased 19.0% to $4.1 million for the three months
ended March 31, 1999 from $5.1 million for the three months ended March 31,
1998. The decrease was due to a 22.6% decrease in the average fuel price per
gallon to 48 cents from 62 cents, and the flying of the lower fuel burn CRJ
aircraft, partially offset by the 30.1% increase in block hours. Aircraft fuel
expense per ASM decreased 19.1% to 1.10 cents from 1.36 cents.
Aircraft and engine rental expense decreased 0.8% to $7.3 million for the
three months ended March 31, 1999 from $7.4 million for the three months ended
March 31, 1998. The decrease in expense is attributable to the retirement of
three Fokker F100s in the last quarter of 1998 and the first quarter of 1999
combined with the rental of spare engines in early 1998, partially offset by the
rental expense of the leased CRJs. Aircraft and engine rentals expense per ASM
decreased 1.5% to 1.95 cents from 1.98 cents. The decrease in cost per ASM
resulted from a combination of the 0.7% increase in ASMs discussed above in
"Capacity" and the lack of rental expense from the owned CRJs.
Commission expense decreased 8.6% to $3.6 million for the three months ended
March 31, 1999 from $4.0 million for the three months ended March 31, 1998. This
was due to a reduction in the commission rate paid and a decrease of travel
agency revenues as a percent of passenger revenue to 63.4% from 68.7%, partially
offset by the 9.3% increase in passenger revenues. Commissions expense per ASM
decreased 9.3% to 0.97 cents from 1.07 cents, primarily driven by the reduction
in the commission rate paid and the decrease in agency revenues offset by the
8.3% increase in passenger revenue per ASM to 14.3 cents from 13.2 cents.
Maintenance, materials and repairs expense decreased 6.3% to $3.9 million for
the three months ended March 31, 1999 from $4.1 million for the three months
ended March 31, 1998. The expense decrease is largely attributable to the new
maintenance contracts on most of the Company's F100 aircraft, and the retirement
of 3 Fokker F100 aircraft, offset somewhat by the increase in block hours.
Maintenance, materials and repairs expense per ASM decreased 7.3% to 1.02 cents
from 1.10 cents due to the changes noted above.
Other rentals and landing fees expense decreased 2.2% for the three months
ended March 31, 1999 from $2.4 million for the three months ended March 31,
1998. The expense decrease is attributable primarily to decreased facility rents
and lower landing fee rates at the Company's hub. Other rentals and landing fees
expense per ASM decreased 3.0% to 0.64 cents from 0.66 cents.
Depreciation and amortization expense increased 66.1% to $1.7 million for the
three months ended March 31, 1999 from $1.0 million for the three months ended
March 31, 1998. Depreciation and amortization expense per ASM increased 64.3% to
0.46 cents from 0.28 cents in the three months ended March 31, 1998. The
increase is attributable to the acquisition of five owned CRJs and related spare
parts.
Other operating expense increased 18.1% to $14.7 million for the three months
ended March 31, 1999 from $12.4 million for the three months ended March 31,
1998. Other operating expenses consist primarily of reservations, ground
handling, advertising, general and administrative expense and insurance. The
expense increase is attributable to the 35.2% increase in departures and 6.7%
increase in passengers, partially offset by savings in insurance, marketing and
administrative expenses. Other operating expense per ASM increased 17.4% to 3.91
from 3.33 cents.
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
Liquidity
The Company's working capital improved during the first three months of 1999
compared to the first three months of 1998. As of March 31, 1999, the Company
had cash, restricted cash, and short-term investments of $58.7 million and
working capital of $27.9 million compared to $51.2 million and $22.9 million
respectively as of March 31, 1998. During the three months ended March 31, 1999,
cash, restricted cash and short-term investments increased $0.5 million,
reflecting net cash provided by operating activities of $6.0 million (net of
changes in restricted cash), net cash used in investing activities of $3.9
million (net of purchases of short term investments), and net cash used in
financing activities of $1.7 million. During the three months ended March 31,
1999, net cash provided by operating activities was primarily due to net income;
net cash used in investing activities was due to net payments of equipment
purchase deposits and purchases of equipment and property; and net cash used in
financing activities reflects repayment of long-term debt.
Capital Resources
Since the February 1997 Recapitalization, the Company has been able to
generate sufficient funds from operations to meet its working capital
requirements and does not currently have any lines of credit. The Company
believes that the working capital available to the Company from ongoing
operations combined with financing commitments arranged with an aircraft
manufacturer will be sufficient to meet its anticipated requirements for capital
expenditures and other cash requirements for the foreseeable future.
Capital Expenditures
The Company's cash outflows for capital expenditures in the three months
ended March 31, 1999 and 1998 were $0.6 million and $0.1 million, respectively,
excluding financed purchases.
The Company has firm orders for 14 additional newly manufactured CRJ-200ER
Canadair Regional Jet aircraft, all of which are scheduled to be delivered by
July 2000. Midway also has options to acquire up to 14 additional CRJs with
delivery dates for the first four of these aircraft extending over a six month
period beginning in the fourth quarter of 2000 and with the delivery dates for
the remaining ten of these aircraft beginning in March 2002. For each aircraft
that is purchased (as opposed to leased), the Company anticipates an initial
cash outlay of approximately $4 million.
The Company intends to finance the purchase of two CF34-3B1 spare engines to
support the operation of its CRJ aircraft. The Company anticipates spending
approximately $2 million on CRJ rotable parts during 1999.
The Company's fixed costs will increase significantly with the induction of
the CRJs. Based on the current interest rate environment, the Company estimates
that its fixed charges will increase by approximately $22 million to $24 million
per year as a result of its debt-financed purchase or leveraged lease financing
of the 14 CRJs on order. However, depending upon the financing method ultimately
chosen, the Company's balance sheet liabilities may or may not increase.
Other Financing
The Company has significant lease obligations for aircraft that are
classified as operating leases and therefore not reflected as liabilities on the
Company's balance sheet. The remaining terms of such leases range from less than
one year to approximately fifteen years. The Company's total rent expense for
the three months ended March 31, 1999 and 1998 under all non-cancelable aircraft
operating leases was approximately $7.2 million and $6.9 million, respectively.
<PAGE>
YEAR 2000
STATE OF READINESS
The Company's Year 2000 Project has been designed to ensure that the
Company's computer systems and embedded operating systems will function properly
beyond 1999. The Project involves five phases: Inventory, Assessment,
Remediation, Testing and Contingency Planning.
The Inventory Phase is essentially complete. During the Inventory
Phase, the Company identified six business-critical functions which rely heavily
on computer or embedded systems for safe or reliable operations. These six
functions include the operation of aircraft, the operation of the Company's
computer reservation system and related telephone systems, the transmission and
reconciliation of credit card sales receipts and collection of money, the
operation of the Company's yield management systems, the operation of the
Company's aircraft dispatch and air traffic control systems as they communicate
with the FAA's air traffic controllers and other agencies and the utilization of
certain time-sensitive crew qualification and tracking systems, and aircraft
maintenance control and planning systems.
The Company has largely completed the Assessment Phase which first
began with a detailed review of these six critical functions and the applicable
systems used by the Company or its vendors in performing these functions. This
review has concluded and the results are as follows:
o With respect to its aircraft, the Company has received assurances
and warranties that the embedded technology in such aircraft and
parts will process date data correctly in the Year 2000. The
manufacturers and suppliers of these aircraft and parts have
provided the Company with regular updates of their investigation
and testing of the component systems for Year 2000 compliance. To
date, the information provided by these sources has not identified
any aircraft or parts in the Company's projected Year 2000 fleet
which are not now Year 2000 compliant.
o With respect to its yield management systems and its computer
reservation system, each of these systems is operated and
maintained by American Airlines, Inc. and/or its affiliate, The
SABRE Group. The SABRE Group has stated that the computer
reservation system is now Year 2000 compliant, with only testing
of minor sub-systems remaining to be completed. The Company's
computer reservation system has begun taking reservations for
travel in the Year 2000. The SABRE Group has also stated that
substantially all of its core systems are either completed or in
the final testing phases of its Year 2000 Project.
o With respect to its telephone systems, the Company recently
installed and is using a new phone switch and related
systems/equipment in its headquarters and reservations center. The
phone switch and related systems/equipment have been warranted as
Year 2000 compliant by the seller, a leading communications
technology company.
o With respect to the systems used in the transmission and
reconciliation of credit card sales, the Company is reliant upon
the systems of the credit card companies, the systems used by
these companies to transact business with their customers' banks
and the systems used by the Company's revenue accounting vendor.
The Company has received written assurances from its revenue
accounting vendor that its systems are Year 2000 compliant and
that it successfully completed Year 2000 testing in September
1998. The Company has reviewed information made available by the
credit card companies (such as MasterCard and American Express)
and these companies have stated that card members should not
experience any problems using cards with expiration dates of the
Year 2000 or beyond.
<PAGE>
o With respect to its primary maintenance control and planning
system, the Company had determined that this system was not Year
2000 compliant. The Company and its third party consultants have
completed remediation of this system and it is now being tested in
use, including the proper tracking of maintenance tasks in the
Year 2000. The Company has developed a contingency plan to utilize
in the event that the current system fails to be Year 2000
compliant. With respect to its crew qualification and tracking
systems, the vendor has warranted the systems should be Year 2000
compliant when operated on an appropriate platform. The Company
has been using these systems on its current platform and the
systems are properly recording Year 2000 events.
o With respect to the Company's aircraft dispatch and related air
traffic control systems, the Company is largely dependent upon the
systems operated by certain governmental entities such as the FAA
that provide the aviation industry with critical information and
reports. The Company is reviewing and will continue to review the
Year 2000 information and readiness reports issued by these
entities.
In summary, the Company identified the computer systems which support
its business-critical functions and has taken necessary remedial actions to
address Year 2000 problems identified during the review of these systems and
which could be addressed within the Company's own systems and facilities. As
part of its Remediation and Testing Phases, the Company continues to review Year
2000 information and reports issued by its vendors and other third parties as
they relate to business critical (and other) functions in order to respond to
systems information or changes that could affect the Company's Year 2000
readiness.
During the Inventory Phase, the Company also identified a number of
other Company functions which require the use of computer systems for operation,
but which are not business-critical. These functions include the preparation of
financial books and records, the scheduling of crew and aircraft, the processing
of payroll and similar functions. The Company has largely completed its Year
2000 assessment with respect to these systems and it intends to complete the
remediation/replacement of any non-compliant, non business-critical systems by
the end of the second quarter of 1999.
As discussed above, the Company's System-Testing Phase has commenced
and the Company has already verified successful testing of third party systems,
or has otherwise commenced or completed testing with respect to its
business-critical functions. With respect to third party computer systems which
support other functions, the Company has limited or no ability to independently
test the systems of third parties which support these operations and must rely
on testing completed and reported by these third parties. To the extent
possible, testing of the systems which support these operations will be
completed in a timely manner.
Although the Contingency Planning Phase of the Company's Year 2000
Project has commenced in a number of select areas, it has not yet been
completed. The Company believes that most of its business-critical and other
functions can be performed manually or without aid of computer systems (such as
scheduling of crew and aircraft and revenue collection processes), but that the
performance of these functions will obviously be materially impacted should
certain systems fail to operate past 1999. To the extent reasonably possible,
the Company intends to develop contingency plans to ensure continued operations
in the event certain systems fail to operate after 1999.
The Company intends to complete the Remediation, Testing, and
Contingency Planning phases in a manner which will allow it to timely prepare
for the Year 2000 cut-over.
Costs of Compliance:
The total costs of the Company's Year 2000 Project are expected to be
immaterial and will be funded from available cash balances. To date, the Company
has incurred less than $100,000 in connection with the Project, all of which has
been expensed as incurred. The cost of the Company's Year 2000 Project is
limited by the substantial outsourcing of its systems, the relative youth of the
Company and its operating systems and the purchase of new technology. The costs
of the Company's Year 2000 Project and the date on which the Company believes it
will be completed are based on management's best estimates and include
assumptions regarding third-party modification plans. Accordingly, there can be
no assurance that these estimates will be achieved and actual results could
differ materially from those anticipated.
<PAGE>
Risks of Non-Compliance:
The Company believes that its Year 2000 Project will be completed prior
to there being any material impact on the operations of the Company, and that,
with modifications to its existing software and systems and/or conversions to
new software, the Year 2000 issue will not pose significant operational problems
for its computer systems. However, there can be no assurance that the systems of
third parties on which the Company's business relies (including those of its
customers, its vendors or the FAA) will be modified on a timely basis. The
Company's business, financial condition or results of operations could be
materially adversely affected by the failure of its systems or those operated by
other parties to operate properly beyond 1999. To the extent reasonably
possible, the Company will be developing and executing contingency plans
designed to allow continued operation in the event of the failure of the systems
of the Company or certain third parties. These contingency plans have not yet
been fully established and the Company has not yet determined the reasonably
estimated worst case scenario. The Company intends to analyze these issues as
part of its Year 2000 Project.
Forward-Looking Statements
The Private Securities Litigation Reform Act of 1995 (the Act) provides a
safe harbor for forward-looking statements made by or on behalf of the Company.
The Company and its representatives may from time to time make written or verbal
forward-looking statements, including statements contained in the Company's
filings with the Securities and Exchange Commission and in reports to share
owners. All statements which address operational performance, events or
developments which are anticipated to occur in the future, including statements
relating to revenue growth, cost reductions and earnings growth or statements
expressing general optimism about future operating results, are forward-looking
statements within the meaning of the Act. The forward-looking statements are and
will be based on management's then current views and assumptions regarding
future events and operating performance.
Some of the factors that could cause actual results to differ materially from
estimates contained in the Company's forward-looking statements include the
following:
o The ability to generate sufficient cash flows to support capital expansion
plans and general operating activities.
o Change in laws and regulations, including changes in accounting standards,
taxation requirements (including tax rate changes, new tax laws and revised
tax law interpretations) and environmental laws.
o Fluctuations in the cost and availability of materials, fuel, equipment and
labor, including the continued availability of landing slots at New
York/LaGuardia and Washington National airports.
o The ability to achieve earnings forecasts, which are based on projected
traffic and fares in the different markets the Company serves, some of
which are more profitable than others.
o Interest rate fluctuations and other capital market conditions.
o The reliance on a limited number of markets and the ability to enter and
develop new markets.
o The effectiveness and availability of resources to support advertising,
marketing, and promotional programs.
o The impact of increased competition in the Raleigh-Durham market on fares,
traffic, new market opportunities and related matters.
o The uncertainties of litigation and/or administrative proceedings.
o Adverse weather conditions, which could affect the Company's ability to
operate.
o The Company's significant dependence on the Raleigh Durham market.
o Control by existing stockholders.
o The Company's indebtedness (including capital lease obligations).
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
The Company is a party to routine litigation incidental to its business.
Management believes that none of this litigation is likely to have a material
adverse effect on the Company's financial position or results of operations.
<PAGE>
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
Through March 31, 1999, net proceeds from the initial public offering
of common stock in December 1997 were used as follows:
1. $1.2 million paid in settlement of the Treasury Lock,
2. $7.0 million to secure the Company's performance of its
obligations under a credit card processing agreement,
3. $6.5 million for aircraft purchase deposits and $17.9 million for
down payments on debt-financed aircraft and other costs on
debt-financed aircraft, and
4. $5.1 million was invested in marketable securities pending future
use.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None to report.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None to report.
ITEM 5. OTHER INFORMATION.
None to report.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
None to report.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities and
Exchange Act of 1934, the registrant has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Midway Airlines Corporation
Registrant
May 14, 1999 By /s/ STEVEN WESTBERG
Steven Westberg
Sr. Vice President and CFO
Exhibit 10.50
Note to Exhibit 10.50
The following Participation Agreement is substantially identical in all
material respects to six additional Participation Agreements except as
follows:
<TABLE>
<CAPTION>
Owner Participant Date Aircraft (Tail No.)
- ----------------- ----
<S> <C> <C>
NCC Charlie Company* September 10, 1998* N575ML*
NCC Charlie Company September 10, 1998 N576ML
General Electric Capital Corporation November 10, 1998 N577ML
General Electric Capital Corporation November 10, 1998 N578ML
Castle Harbour Leasing Inc. December 10, 1998 N579ML
NCC Charlie Company January 25, 1999 N580ML
General Electric Capital Corporation April 14, 1999 N581ML
</TABLE>
- ------------------
* Filed as Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q for the
quarter ended September 30, 1998.
EXHIBIT 10.51
Note to Exhibit 10.51
The following Trust Agreement is substantially identical in all
material respects to six additional Trust Agreements except as follows:
<TABLE>
<CAPTION>
Owner Participant Date Aircraft (Tail No.)
- ----------------- ----
<S> <C> <C>
NCC Charlie Company* September 10, 1998* N575ML*
NCC Charlie Company September 10, 1998 N576ML
General Electric Capital Corporation November 10, 1998 N577ML
General Electric Capital Corporation November 10, 1998 N578ML
Castle Harbour Leasing Inc. December 10, 1998 N579ML
NCC Charlie Company January 25, 1999 N580ML
General Electric Capital Corporation April 14, 1999 N581ML
</TABLE>
- ------------------
* Filed as Exhibit 10.3 to the Company's Quarterly Report on Form 10-Q for the
quarter ended September 30, 1998.
EXHIBIT 10.52
Note to Exhibit 10.52
The following Trust Indenture and Security Agreement is substantially
identical in all material respects to six additional Trust Indenture and
Security Agreements except as follows:
<TABLE>
<CAPTION>
Aircraft
Owner Participant Date (Tail No.) Amortization
- ----------------- ----
<S> <C> <C> <C>
NCC Charlie Company* September 10, 1998* N575ML* *
NCC Charlie Company September 10, 1998 N576ML *
General Electric Capital Corporation November 10, 1998 N577ML *
General Electric Capital Corporation November 10, 1998 N578ML *
Castle Harbour Leasing Inc. December 10, 1998 N579ML **
NCC Charlie Company January 25, 1999 N580ML **
General Electric Capital Corporation April 14, 1999 N581ML ***
</TABLE>
- ------------------------------
* Filed as Exhibit 10.4 to the Company's Quarterly Report on Form 10-Q for the
quarter ended September 30, 1998.
** Filed as Exhibit 10.52 to the Company's Annual Report on Form 10-K/A for the
year ended December 31, 1998.
*** As attached hereto
<PAGE>
<TABLE>
<CAPTION>
Annex B
Amortization Schedule for N581ML
---------------------------------
Series A Series B Series C Series D
Equipment Equipment Equipment Equipment
Payment Date Notes Notes Notes Notes
- ------------- ---------- ----------- ----------- ------------
<S> <C> <C> <C> <C>
Jul 2 1999 0.00 0.00 351,833.66 0.00
Jan 2 2000 221,543.20 95,878.00 254,943.73 0.00
Jul 2 2000 0.00 0.00 0.00 0.00
Jan 2 2001 221,542.20 95,877.00 168,729.24 138,316.49
Jul 2 2001 0.00 0.00 0.00 0.00
Jan 2 2002 221,542.20 95,877.00 0.00 360,268.03
Jul 2 2002 0.00 0.00 0.00 0.00
Jan 2 2003 221,542.20 95,877.00 290,585.09 127,875.48
Jul 2 2003 0.00 0.00 0.00 0.00
Jan 2 2004 221,542.20 95,877.00 482,198.09 0.00
Jul 2 2004 0.00 0.00 0.00 0.00
Jan 2 2005 221,542.20 95,877.00 551,925.21 0.00
Jul 2 2005 0.00 0.00 0.00 0.00
Jan 2 2006 221,542.20 230,805.09 492,684.98 0.00
Jul 2 2006 0.00 0.00 0.00 0.00
Jan 2 2007 221,542.20 658,557.93 0.00 0.00
Jul 2 2007 0.00 0.00 0.00 0.00
Jan 2 2008 221,542.20 360,900.73 0.00 0.00
Jul 2 2008 0.00 0.00 0.00 0.00
Jan 2 2009 279,716.05 562,582.80 0.00 0.00
Jul 2 2009 0.00 0.00 0.00 0.00
Jan 2 2010 907,585.31 0.00 0.00 0.00
Jul 2 2010 0.00 0.00 0.00 0.00
Jan 2 2011 974,772.15 0.00 0.00 0.00
Jul 2 2011 0.00 0.00 0.00 0.00
Jan 2 2012 1,046,932.70 0.00 0.00 0.00
Jul 2 2012 0.00 0.00 0.00 0.00
Jan 2 2013 320,809.06 807,790.45 0.00 0.00
Jul 2 2013 0.00 0.00 0.00 0.00
Jan 2 2014 1,216,358.50 0.00 0.00 0.00
Jul 2 2014 0.00 0.00 0.00 0.00
Jan 2 2015 644,685.43 0.00 0.00 0.00
Jul 2 2015 0.00 0.00 0.00 0.00
N579ML
</TABLE>
EXHIBIT 10.53
Note to Exhibit 10.53
The following Indenture Supplement is substantially identical in all
material respects to six additional Indenture Supplements except as follows:
<TABLE>
<CAPTION>
Owner Participant Date Aircraft (Tail No.)
- ----------------- ----
<S> <C> <C>
NCC Charlie Company* September 10, 1998* N575ML*
NCC Charlie Company September 10, 1998 N576ML
General Electric Capital Corporation November 10, 1998 N577ML
General Electric Capital Corporation November 10, 1998 N578ML
Castle Harbour Leasing Inc. December 10, 1998 N579ML
NCC Charlie Company January 25, 1999 N580ML
General Electric Capital Corporation April 14, 1999 N581ML
</TABLE>
- ------------------
* Filed as Exhibit 10.5 to the Company's Quarterly Report on Form 10-Q for the
quarter ended September 30, 1998.
EXHIBIT 10.54
Note to Exhibit 10.54
The following Lease Agreement is substantially identical in all
material respects to six additional Lease Agreements except as follows:
<TABLE>
<CAPTION>
Rental and
Lease Related
Aircraft Termination Terms
Owner Participant Date (Tail No.) Date
<S> <C> <C> <C> <C>
NCC Charlie September 10, 1998* N575ML* March 30, 2015* **
Company*
NCC Charlie Company September 10, 1998 N576ML March 30, 2015 **
General Electric Capital November 10, 1998 N577ML May 12, 2015 **
Corporation
General Electric Capital November 10, 1998 N578ML May 13, 2015 **
Corporation
Castle Harbour Leasing Inc. December 10, 1998 N579ML June 15, 2015 **
NCC Charlie Company January 25, 1999 N580ML July 28, 2015 **
General Electric Capital
Corporation April 14, 1999 N581ML October 14, 2015 **
</TABLE>
- ------------------
* Filed as Exhibit 10.6 to the Company's Quarterly Report on Form 10-Q for the
quarter ended September 30, 1998.
** Confidential treatment requested.
EXHIBIT 10.55
Note to Exhibit 10.55
The following Lease Supplement is substantially identical in all
material respects to six additional Lease Supplements except as follows:
<TABLE>
<CAPTION>
Lease
Aircraft Termination
Owner Participant Date (Tail No.) Date
- ----------------- ---- ----
<S> <C> <C> <C>
NCC Charlie Company* September 10, 1998* N575ML* March 30, 2015*
NCC Charlie Company September 10, 1998 N576ML March 30, 2015
General Electric Capital Corporation November 10, 1998 N577ML May 12, 2015
General Electric Capital Corporation November 10, 1998 N578ML May 13, 2015
Castle Harbour Leasing Inc. December 10, 1998 N579ML June 15, 2015
NCC Charlie Company January 25, 1999 N580ML July 28, 2015
General Electric Capital Corporation April 14, 1999 N581ML October 14, 2015
</TABLE>
- ------------------
* Filed as Exhibit 10.7 to the Company's Quarterly Report on Form 10-Q for the
quarter ended September 30, 1998.
EXHIBIT 10.56
Note to Exhibit 10.56
The following Purchase Agreement Assignment is substantially identical
in all material respects to six additional Purchase Agreement Assignments
except as follows:
<TABLE>
<CAPTION>
Owner Participant Date Aircraft (Tail No.)
- ----------------- ----
<S> <C> <C>
NCC Charlie Company* September 10, 1998* N575ML*
NCC Charlie Company September 10, 1998 N576ML
General Electric Capital Corporation November 10, 1998 N577ML
General Electric Capital Corporation November 10, 1998 N578ML
Castle Harbour Leasing Inc. December 10, 1998 N579ML
NCC Charlie Company January 25, 1999 N580ML
General Electric Capital Corporation April 14, 1999 N581ML
</TABLE>
- ------------------
* Filed as Exhibit 10.8 to the Company's Quarterly Report on Form 10-Q for the
quarter ended September 30, 1998.
EXHIBIT 10.57
Note to Exhibit 10.57
The following Engine Warranty Assignment is substantially identical in
all material respects to six additional Engine Warranty Assignments except as
follows:
<TABLE>
<CAPTION>
Owner Participant Date Aircraft (Tail No.)
- ----------------- ----
<S> <C> <C>
NCC Charlie Company* September 10, 1998* N575ML*
NCC Charlie Company September 10, 1998 N576ML
General Electric Capital Corporation November 10, 1998 N577ML
General Electric Capital Corporation November 10, 1998 N578ML
Castle Harbour Leasing Inc. December 10, 1998 N579ML
NCC Charlie Company January 25, 1999 N580ML
General Electric Capital Corporation April 14, 1999 N581ML
</TABLE>
- ------------------
* Filed as Exhibit 10.9 to the Company's Quarterly Report on Form 10-Q for the
quarter ended September 30, 1998.
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 51,465
<SECURITIES> 7,275
<RECEIVABLES> 12,359
<ALLOWANCES> (1,667)
<INVENTORY> 2,779
<CURRENT-ASSETS> 83,110
<PP&E> 114,769
<DEPRECIATION> (12,492)
<TOTAL-ASSETS> 213,717
<CURRENT-LIABILITIES> 55,203
<BONDS> 77,024
0
0
<COMMON> 86
<OTHER-SE> 74,382
<TOTAL-LIABILITY-AND-EQUITY> 213,717
<SALES> 0
<TOTAL-REVENUES> 54,986
<CGS> 0
<TOTAL-COSTS> 47,665
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (859)
<INCOME-PRETAX> 6,462
<INCOME-TAX> 2,456
<INCOME-CONTINUING> 4,006
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,006
<EPS-PRIMARY> 0.47
<EPS-DILUTED> 0.42
</TABLE>
